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Penny stocks are such shares that trade at very low prices. Almost all investors look for a stock of a nature that can someday bring in a significant return on investment. By definition, penny stocks trade at levels below $5 and are often not listed on the biggest exchanges. Additionally, the liquidity in penny stocks is low and that is also a reason why big moves happen.

More often than not, penny stocks belong to small businesses which wish to raise capital from the markets. These businesses might take a long time before they can turn into a big enough operation. But if these companies do so, then the investors can expect a handsome return. At the same time, it is perhaps far more necessary to know when to invest in penny stocks.

Watch The Money Flows

There are some tried and true methods in which an investor can zero in on a penny stock that could be ripe for picking. One of the surest ways to identify such a penny stock is to see whether new money is flowing into the stock.

You
can observe the money flows by using some online available technical analysis
indicators, such as Money Flow and Money Flow Index (MFI).

Activities In Penny Stock Trading Volume

Penny stock trading volume is the next factor that should be looked at by any prospective investor. A rise in trading volume is usually an indication that a stock is primed to for a big move and is usually due to some good news with regards to the company’s business. More often than not, the stock price rises and eventually steadies at a price at which there is no longer any demand for investors. It is important for an investor to get in at the right time if he or she wants to benefit from such a move.

Fundamentals Of The Company

The most important thing before investing penny stocks is perhaps to look through the fundamentals of a specific company over a sustained period of time. If there is a trend that shows that the company is cutting costs or keeping it under control, while the revenues rise steadily, then it could be ripe for investment.

In the life span of a penny stock, the first target for the business is perhaps to grow revenues and controlling costs before turning a profit. The intelligent investor needs to identify when the company is on the verge of making a profit.

Penny Stocks & Media Coverage

It
is a good idea to check out more about a penny stock company if there is a
spike in media coverage about a company. In addition to that, discussions about
business among people in the community could also be a fair indication of the
possibilities of a small company. For instance, if there is a lot of discussion
about a small coffee shop chain that is listed as a penny stock, then there is
a possibility that the stock could be readying for an upsurge.

Other Factors To Watch When It’s Time To Buy Penny Stocks

Other than that, a closer look at the company’s management and how they go about their job is almost always a good indication of which way the company might go. If management has worked for other companies in the past, their record in that company could give an idea of how they would do with a small company.

On
the other hand, if a company is actually doing well and if its small business
is about to go big, then there is a possibility of it getting much more
coverage in the mainstream media. It is a good idea to check out more about a
penny stock company if there is a spike in media coverage about a company.